Bank Of America: There Are 300,000 Reasons That Tesla Is Massively Overvalued

The electric car manufacturer helmed by ambitious CEO Elon Musk is up about 240% YTD, and now sits at $121.

But Bank of America Merrill Lynch's John Lovallo II and John Murphy are holding firm to their original $39 price target.

In a note this morning, they write that there are "300,000 reasons" to be skeptical of Tesla's climb — that's how many units the company's current compound annual growth rate implies would be sold in 2020:

... we estimate that a $120 share price implies over 321K vehicle sales in 2020, which is a full 300K units higher than our current 2013e and would represent a 7-year CAGR of 48%. We also note that this analysis assumes TSLA can achieve EBIT margins of about 12.5% in 2020, which would be over 380bps better than the 2012 average of BMW, Mercedes, Audi, Bentley, and Porsche and 400bps better than our European analyst’s forecasts for this group in 2015.

A 48% growth rate has never been achieved by any other auto manufacturer ever:

We analyzed the lifecycle of over 130 vehicles categorized as luxury by Ward’s Auto, the result of which indicate that approx. 70% reach peak volume within the first 8 quarters of launch. In other words, if Tesla’s vehicles follow a pattern similar to the industry norm, volumes could begin leveling off within the next year, rather than growing into perpetuity as the current share price would suggest.

They also warn the Q4 2013 gross margin growth target 0f 25%, even if reached, could end up being the product of an accounting trick:

While Tesla has stated that its 25% 4Q13 gross margin target excludes any potential positive impact from Zero Emission Vehicle Credits (ZEVs), it remains unclear if the company intends to include the potential benefit from Green House Gas Credits (GHG) or Corporate Average Fuel Economy (CAFE) credits (both listed as “Other Regulatory Credits” in Tesla’s SEC filings) in its calculation.

They conclude: "While nothing is impossible, particularly with Elon Musk at the helm, we believe these assumptions warrant a healthy degree of skepticism."